The credit limit on a credit card is the maximum amount you can spend before needing to repay it. A high credit card spending limit can provide spending power to people who can pay off their debt on time and not incur too much in the way of interest charges and fees. However, for people who use a high credit card spending limit as permission to overspend, there can be problems.
You can request a credit limit increase, but credit card issuers sometimes automatically increase the credit limit of those who have shown they can manage credit well. But is a higher spending limit a good thing? It may not be for everyone’s financial situation. Here’s how to know if your credit card spending limit is too high.
How Does My Credit Card Spending Limit Work?
Credit cards are a form of revolving debt, which means that there is an upper spending limit. However, the credit can be repaid and used again. It revolves between being available to use, being unavailable because it’s being used, and being available to use again after it’s been repaid.
A credit card issuer typically bases the credit limit on factors such as the applicant’s credit score, income, credit history, and debt-to-income ratio. However, every credit card company differs in which factors it considers and how much emphasis it places on each component.
There may be multiple types of credit limits on the same credit card, e.g., a daily spending limit or cash advance limit.
How much is typical? The current credit card limit for the average American is almost $30,000. However, it’s worth noting, it doesn’t mean you should spend the full amount of your limit.
In fact, you may want to spend no more than 30% of your limit to maintain your financial wellness and to help build your credit score. In fact, many financial experts suggest a credit utilization of 10%. That would mean that if, say, your credit limit was $30,000, you would only carry a balance of $3,000.
Why Your Credit Card Issuer Increased Your Spending Limit
Your spending limit isn’t set in stone, though. Even if you haven’t specifically requested a credit limit increase, your credit card issuer may automatically increase the credit limit on your card.
There are various reasons this might happen.
• Your credit has improved, resulting in a higher credit score.
• Your income has increased.
• The credit card issuer wants to retain you as a customer by offering a higher credit limit.
By increasing your credit card spending limit, the credit card issuer may have hopes that you’ll carry a balance on your card.
One stream of revenue for them is interest charges and fees. If you carry a balance, rather than paying your balance in full each month, you’ll be charged interest on the outstanding amount. And if you fail to make at least the minimum payment due or pay the bill late, you’ll likely be charged a late fee.
Both interest charges and fees are then added to the balance due on the next statement, and themselves incur interest. Essentially, you’ll be paying interest on interest.
Pros of a High Credit Card Spending Limit
For some people, due to their financial needs or goals, there may be practical reasons for having a high credit card spending limit.
• It can be helpful in an emergency situation. Even if you’ve accumulated an emergency fund or rainy day fund, there might be instances when you need more than that. For instance, if your refrigerator suddenly stops working, you’ll probably want to replace it sooner rather than later. Large appliances can cost several thousand dollars to purchase and have installed.
• Having a high credit limit while using a small percentage of it can lower your credit utilization rate. Your credit utilization rate is the relationship between your spending limit and your balance at any given time. If your limit is $10,000, and your balance is $1,500, your credit utilization is 15%. Generally, the lower your credit utilization rate, the better (below 30% or closer to 10% is best).
• If you have a rewards credit card, having a higher spending limit on it could mean reaping greater rewards, whether that’s cash back, miles, or another type of reward. Being financially able to pay the account balance in full each month is key to making the most of this strategy.
Cons of a High Credit Card Spending Limit
As attractive as the benefits might sound, there can be drawbacks to having a high credit card spending limit.
• You might be tempted to spend because you can, even if you can’t pay your credit card balance in full at the end of the billing period. This will result in purchase interest charges being added to the unpaid balance, and interest will accrue on this new, larger balance. It can become a debt cycle for some people.
• Having a high credit limit and using a large percentage of it can increase your credit utilization rate. This rate is one of the most important factors in the calculation of your credit score — it accounts for 30% of your FICO® Score, and is considered “extremely influential” to your VantageScore®. It’s generally recommended to keep your credit utilization rate to 30% or less, as mentioned above.
• Requesting an increase in your credit card spending limit could cause your credit score to decrease slightly. The credit card issuer might do a hard credit inquiry into your credit report, which can mean a ding of several points (say, between five and 10) to your credit score, depending on your overall credit. It’s usually a temporary drop, but if you’re planning to apply for a loan or other type of credit, it could make a difference in the interest rate you’re offered.
What Happens if You Go Over Your Spending Limit
The Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) put consumer protections against unfair credit card practices into place. One of the stipulations in this Act is that credit card issuers cannot charge an over-the-limit fee unless the card holder opts into an agreement for charges above the credit limit to be paid.
If you choose not to opt in to this agreement, any charges you try to make that exceed your credit card spending limit will be denied.
If you do opt in, the excess charges will be paid, but the credit card issuer may charge a fee for covering the overage amount. Generally, the first-time fee can be up to $25. If you exceed your spending limit a second time within six months, you could be charged up to $35. The fee can’t be larger than the amount you went over your credit limit by, though. So, if you charge a purchase that’s $100, but you only have $90 of available credit, the over-limit fee would be $10.
Before you opt in to an agreement like this, the credit card issuer must tell you what potential fees there might be. They must also provide you with confirmation that you opted in.
If you opted in to an over-the-limit agreement, but no longer want it, you can opt out at any time by contacting your credit card issuer’s customer service department.
Recommended: Maxed-Out Credit Card: Consequences and Steps to Bounce Back
Taking Control of Credit Card Debt
A higher spending limit can be a good thing if it’s used responsibly. Looking for a credit card that has more favorable rewards or offers perks that your current credit cards don’t have could be a good option for managing your debt.
If you’re struggling with credit card debt and a higher credit card spending limit is not an option for your financial situation or comfort level, another possible option could be to consolidate high-interest credit card debt with a personal loan.
With a credit card consolidation loan, all your balances are merged into one new loan with just one monthly payment and one interest rate instead of several. This new interest rate could end up being lower than the rates on your current individual credit cards, which could lower your monthly debt payment.
Also, a personal loan is installment debt, which means there will be a payment end date. Credit cards are revolving debt with no firm end date.
The Takeaway
A higher credit card spending limit may or may not be a positive thing, depending on your financial situation. You may have requested a credit limit increase or your credit card issuer may have automatically increased your spending limit because of factors such as an improved credit score or increased income, among others. But if the amount of credit you’ve been approved for results in poor financial decision making or increased debt, your credit card spending limit may be too high.
Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.
FAQ
What’s the average credit card limit?
Currently, the average credit card limit is close to $30,000.
Can a spending limit be too high?
Depending on your financial situation, a spending limit could be too high. If that high limit encourages you to overspend and carry a high level of debt at a high interest rate, it could be problematic.
Is it bad to use 50% of your credit limit?
Financial experts recommend that you use no more than 30% of your credit limit, preferably close to 10%. Going higher than that can negatively impact your credit score and your financial health.
Photo credit: iStock/mixetto
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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